Tanzania backs out of EAC trade pact with the EU

The Tanzanian government withdrew its commitment to a trade pact between the East Africa Community (EAC) and the EU on July 9th, amid concerns that post-Brexit Europe was in turmoil. If the Tanzanian government stands by its decision and the deal collapses, over a decade of negotiations between the two trade blocs would probably unravel. The economic implications would fall hardest on Kenyan exporters. The political repercussions are potentially broader, with the ensuing diplomatic row between the bloc's two largest economies underscoring concerns about political harmony within the EAC.

Economic Partnership Agreements (EPAs) are designed to grant African regional blocs' access to EU markets and gradually open African markets up to EU exports. The EAC's agreement also contained a number of aspects beyond trade, including commitments to a policy dialogue on sustainable agriculture production and a pledge from the EU that it will provide economic and development assistance to boost the EAC's competitiveness. The EPA was signed two weeks after the EU's official deadline of October 2014 had expired and has been awaiting ratification by member states since then. This ratification was scheduled for July 18th in Nairobi, Kenya, but—in an unexpected U‑turn—the Tanzanian government has asked parliament for reconsider the appropriateness of the arrangement.

Protectionist tendencies in Tanzanian policymaking

The permanent secretary of Tanzania's Ministry of Foreign Affairs, Aziz Mlima, said that the government's decision came in light of renewed market turmoil in EU after the UK voted on June 23rd to leave the bloc. However, several Tanzanian officials have since raised wider concerns over the impact that competition with EU exporters would have on domestic businesses. Politicians, business groups and academics in Tanzania have argued that, by allowing free trade with European counterparts, local firms will be priced out of the domestic market by an influx of highly competitive imports and industrial development will suffer. The authorities have also pointed to the potential loss of government revenue that might result from the lowering of tariffs on imported foreign goods.

However, this is set against the wider benefits for consumers and businesses across the EAC that could be gained through trade liberalisation. The EU is an important trading partner for the EAC, including Tanzania. (The EU received the second-largest share (after India) of Tanzanian exports in 2015, recorded at over US$1.1bn). In a bid to protect local firms, specific safeguards were explicitly set out in the EPA. Trade defence clauses, for example, allow partner states to reintroduce tariffs if imports threaten economic stability or infant industries. The EAC had also negotiated the exclusion of a number of key products from import liberalisation in an effort to spur its own nascent industries.

The economic arguments do, however, overlook the ideological dynamics at play. Tanzania's reluctance to open up its borders stems from a long-standing propensity towards economic nationalism, which sets it apart from the other more outward-looking members of the EAC. This chimes with a broader pattern of economic policymaking that still bears traces of the country's socialist past, despite pursuing some free-market reform over the past decade. The Brexit vote has provided the Tanzanian government with an excuse to explain its decision to the EU, but—as far as Tanzanian voters are concerned—it was a decisive move by the Magufuli administration to prioritise local industrialisation over international friendships.

Despite a recent flurry of crossborder deals, the potential breakdown of the EU deal will risk exposing the underlying economic disparities within the EAC. Four members of the EAC—Tanzania, Uganda, Rwanda and Burundi—will continue to qualify for duty- and quota-free access to EU markets, owing to their classification as least-developed countries. Kenya, which achieved middle-income status in 2015, would lose this privilege if the proposed EPA is not ratified by October 2016. As the largest economy in the bloc and with an increasingly diversified export base, Kenya is particularly reliant on trade with the EU. As an indication of the potential consequences, the late signing of the EPA in 2014 meant that Kenyan exports to the EU—notably horticulture—faced tariffs of 4‑24% for three months and, in a bid to retain EU market share, Kenyan firms were forced to slash their prices.

Kenyan exporters have the most to lose if the EPA collapse and Kenyan officials (aside from publicly lambasting the Tanzanians for "intentionally" scuppering the deal) are expected to lead the EAC's efforts to convince the Tanzanian government to reverse its decision. Political relationships in the region are already being tested by disagreement over non-tariff barriers, wrangling over the route of an oil pipeline, and renewed conflict in the bloc's newest member, South Sudan. The Tanzanian government's decision reaffirms our view that its recent enthusiasm for crossborder infrastructure is spurred by economic opportunism, rather than an ideological shift towards regional co-operation. It also raises concerns about the extent of political harmony in the bloc and, with the second-largest member still reluctant to relinquish economic sovereignty, the prospect of a political union remains a very long way off.